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HomeMy WebLinkAboutAgenda - 12-04-1995 - X-C ` 1 ORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT MEETING DATE: December 4, 1995 Action Agenda Item # X-C- SUBJECT: Orange County Small Business Loan Program DEPARTMENT: Economic Development PUBLIC HEARING:—Yes NO Commission ATTACHMENT(S): INFORMATION CONTACT: O.C. Small Business Loan Program Operating Policies and Procedures Ted Abernathy(ext. 2325) (pages 2-7) TELEPHONE NUMBERS: Hillsborough - 732-8181 Durham - 699-7331 Mebane - (910) 227-2031 Chapel Hill - 967-9251/968-4501 Purpose: To receive and provide input on a proposal to develop an Orange County Small Business Loan Program. Background: The Economic Development Strategic Plan calls for the encouragement of small business in Orange County through "creative financing options". At the strong encouragement of the EDC Board of Directors, the staff has been working with the local banking community to develop a small business loan program. A verbal agreement has been reached with the bankers to participate in a 3-year, one half million dollar loan pool. If developed, this program would provide market-rate loans to local small businesses. The banks would provide all initial capital at cost. The County would manage the program and provide a 30-% loan loss reserve. i Recommendation: If the program as presented meets with the general approval of the Commissioners, the staff should be directed to develop the legal documents to start the program and bring this item back for final approval. 2 ORANGE COUNTY SMALL BUSINESS LOAN PROGRAM Operating Policies and Procedures Final Draft Proposal 3 ORANGE COUNTY SMALL BUSINESS LOAN PROGRAM PURPOSE The purpose of this program is to stimulate successful business development and expansion as well as job creation in Orange County. The program will attempt to assist businesses that have limited access to financing through conventional means or other government guaranteed sponsored programs. AMOUNT Initial loan capacity up to $500,000, funded by commitments from local financial institutions over a three-year period. COMMITMENT PERIOD Three years from the date of execution of the loan agreement. ELIGIBILITY 1. Businesses located within Orange County. 2. Applicants may be required to participate in the NC Small Business& Technology Development Center(SBTDC)technical assistance program. 3. Applicants must be a for-profit business entity whose gross revenues do not exceed $3 million. 4. Applicants must be willing to contract for management and technical assistance if determined to be necessary by the Loan Committee and/or the Program Administrator. 5. Applicants must have an equity contribution in a start-up business of 15%. 6. Individuals with an ownership position of 20%or more of the outstanding shares of stock of the business will be required to execute an Unconditional Guaranty Agreement for the full amount of the loan. 4 ELIGIBLE USES OF LOAN PROCEEDS 1. Working capital or operational funds. 2. Purchase of equipment, commercial-use vehicles, or machinery. 3. Improvement of owner-occupied commercial property. (Owner must occupy 50%or more of total space.) 4. Start-up funding. 5. Expansion of business services or products. 6. Acquisition of owner-occupied commercial real estate(7-year maturation) 7. Tenant upfit and lease-hold improvements. LOAN PROCEEDS SHALL NOT BE USED FOR THE FOLLOWING 1. Refinancing of existing bank debt or investor loans. (Refer to exception in Collateral section. The loan committee may grant an exception of up to 50%of loan value.) 2. Purchase of equipment or improvement of real estate which is used as personal property. 3. Political activities. 4. Owner salary and dividend payments beyond an agreed amount. 5. Speculative ventures (Examples: drilling for gas or oil, commodity futures) 6. Lending or investment. 7. Real property held for sale or investment. 8. Movie theaters. 9. Pyramid sales - distribution plan businesses. 10. Floor plan financing. 5 11. Individuals with pending criminal charges or who are incarcerated, on probation, or parole. 12. Foreign controlled businesses. 13. Non-profit institutions. 14. Fishing and shore operations. 15. Private membership clubs. 16. Buildings listed on the National Register of Historical Places. COMPLIANCE WITH APPLICABLE REGULATIONS In all cases, loans made from this program must be consistent and in accordance with the following: 1. All state and local regulations governing the applicant's line of business. 2. Policies established by the Loan Committee for each particular applicant. 3. Policies established by the Board of County Commissioners dealing with this loan program. Amount of Loans Maximum: $50,000. Minimum: $5,000. Should market conditions change, or in the event of an applicant with extra-ordinary conditions, an alternative loan May be considered. All loans are subject to availability. LOAN TERM Maximum Term - 5 years INTEREST RATE All loans will accrue interest on a daily basis at a floating interest rate. Interest rates will be quoted based on the Wall Street Prime Rate plus a spread based on the maturity of the loan: 0-2 years Prime plus 2.00% i 6 2-3 years Prime plus 2.25% 34 years Prime plus 2.501/o 4-5 years Prime plus 3.00% Regarding term loans, Borrower will have option to pay interest at the floating accrual rate, or a fixed payment rate based on the following schedule: • One to three year maturity - accrual rate quoted at the origination date of loan +1% • Three to four year maturity - accrual rate quoted at the origination date of loan+1 1/2% • Four to five year maturity - accrual rate quoted at the origination date of loan+2% The loan committee may consider amount of loan, term, and collateral in making adjustments in the rate that they deem appropriate. FEES AND EXPENSES An origination fee will be charged, payable at closing, ranging from 1/4%to 1%, but, in no case to exceed limits set by North Carolina Statutes. The minimum origination fee will be$50. The applicant will be responsible for all other expenses related to closing the loan, including, but not limited to, recording fees and legal fees. The applicant will also be responsible for any fees related to any appraisals or reports required by the Loan Committee. LOAN REPAYMENT Loan repayments shall be due on the first day of the month. A late payment will be assessed at 2%of the payment amount after the loan becomes 15 days overdue. Loans may be prepaid without penalty. In the event the loan payment becomes 30 days overdue, the Loan Committee will establish and implement the Procedures for the Collection of Delinquent Loans. COLLATERAL Loans shall be secured by appropriate forms of collateral, with recorded first lien positions as appropriate. Acceptable forms of collateral will be based on commonly accepted definitions (fixed assets, inventory, accounts receivable, land, building, equipment, or personal assets). Advance rates should be limited to the following percentages: Inventory - 50%; accounts receivables - 70%on accounts less than 90 days in age; unimproved real estate - 501/6; commercial real estate - owner-occupied maximum 80%LTV, or 85%LTV on personal real estate; new equipment- 80%, and used equipment-60%. 7 SUGGESTED LOAN GUIDELINE 1. Creditworthiness - Although applicants will be considered with credit ratings showing a history of accounts up to 30 days past due, preference will be given to borrowers with good credit ratings. Applicants with bankruptcy or repossessions listed on their credit report will, in most cases, be considered too great a credit risk for this program. 2. Cash Flow Coverage - The-loan program is targeted to applicants with a cash flow coverage, prior to new debt, (as hereafter defined)of not less than 1.1 to 1 to current maturities of long-term debt. Cash Flow is further defined as net income plus depreciation. 3. Debt To Worth - The loan program is targeted to applicants whose total debt does not exceed net worth by 3 to 1. LOAN PROGRAM ADMINISTRATION Administration of this loan program shall initially be performed by the Orange County Economic Development Commission. An outside vendor acceptable to the financial institutions and the County will be utilized to service these loans, to include billing and generating administrative reports. PROCEDURES' 1. Applicants will be referred to the Orange County Economic Development Commission who will meet with them and process applications. This process will utilize the services of the NC Small Business& Technology Development Center(SBTDC)or other small business consulting resources that might be available. 2. The County will submit completed applications to the Loan Committee no later than two weeks prior to its next scheduled meeting. The Loan Committee will normally meet once monthly. 3. At the monthly meeting, the Loan Committee will decide whether or not to take action on the request, based on the information provided. The County will inform the applicant in writing of the Loan Committee's decision. Should the Loan Committee deny the applicant's application, the Loan Committee will not consider any applications from that applicant for at least six month. 4. At its discretion, the Loan Committee may impose any additional terms and conditions necessary to improve the loan or to secure the applicant's loan. 5. Should the applicant feel that his/her application has been improperly denied, then he/she i 8 should notify, in writing, the Chair of the Loan Committee of his/her position. Denial of the application shall then be reviewed by the Loan Committee for further consideration. LOAN ANALYSIS The Loan Committee shall review and consider a number of items in determining whether a loan should be made. Those items shall include at least the following: 1. Business plan. 2. Business financial statements. (3 years plus interim) 3. Tax returns. (personal and business - 3 years) 4. Pro formas to determine if there will be sufficient cash flow to meet obligations for 2 years. 5. Personal financial statements. 6. Information regarding collateral and a current credit report. 7. Other available financing including, but not limited to, whether other financial institutions have agreed to consider traditional debt financing and under what circumstances. 8. Should the Loan Committee determine that it needs additional information before granting or denying the application, the Program Administrator will notify the applicant of the information needed. PROPOSED STRUCTURE The relationship between the participating financial institutions and Orange County will be evidenced by a Master Loan Agreement. Each participant will commit a revolving credit line on a non-recourse basis to an entity determined by appropriate legal review of the proposed structure. These credit lines will be secured by assignment of the loan receivables to such entity. A 24-month commitment period will be established during which time each financial institution will fund approved loans on a pro-rata basis. Funding procedures, to include a provision for an appropriate notice mechanism, would be established. At the end of the commitment period, to the extent there are amounts owned under the loan program, the amounts owed would be "termed" for a period of no later than the latest scheduled maturity date for loans outstanding to Borrowers under the program. The County will provide an irrevocable commitment to fund a loan loss reserve equal to 30%of the financial institutions' commitment. All financial institution 9 participants will bear their share of any losses beyond the reserve(principal, interest, collection fees, etc.) incurred under the program. Collection procedures and loss procedures will be established. Repayment of the financial institutions' loans will be on a monthly basis and will consist of the net proceeds received from Borrowers under the program. The established entity will pay each financial institution its percentage share of those net proceeds on a monthly basis. This proposed structure may be subject to modification based upon the review and advice of appropriate counsel. LOAN LOSS RESERVE • In the first year a Loan Loss Reserve of$45,000(30%)must be 100% irrevocably committed by Orange County prior to implementation or activation of the Orange County Loan Program. In year two, an additional $50,000 must be committed. In year three, $55,000 must be committed, bringing the County total to 30%of the one half million dollar loan capacity. • Loan Loss Reserve to be provided by Orange County shall be funded in an amount not less than 30%of the aggregate loans made during the term of the program, less amounts paid from the reserve to the participating financial institutions. LOAN COMMITTEE Membership shall consist of 6 representatives from the participating financial institutions and 2 representatives appointed by the County. Selection of the 6 initial members shall be made by the members of the Loan Pool Task Force, with no less than 4 members of this initial selection representing financial institutions serving on the Task Force. Appointees will serve staggered terms established by the Task Force in order to provide for future rotation of 2 members each year. Future membership selection from the participating financial institutions will be determined by a majority vote of the sitting members of the Loan Committee, such election to occur annually during the month of June. Meetings will be presided over by a Chair, who will be elected by the Committee each June. It will be the responsibility of the Chair to assure a quorum is present(5 members or more at each Loan Committee meeting), to generally monitor the duties of the Loan Program Administrator, to make sure loan proposal packages are properly prepared prior to their presentation at Loan Committee meetings, and to oversee the preparation of commitment letters to approved borrowers. Such commitment letters will be signed by the Chair, with a duplicate signed copy provided to the County as part of their notice for funding the Loan Loss Reserve. The Loan Committee will have the following responsibilities: 1. Find creative ways to utilize loanable funds to stimulate successful small business development and job creation. 2. Meet monthly to review loan applications and determine which request will be approved 10 and under what terms and conditions. 3. Periodically review status of existing loans and recommend appropriate corrective action or special monitoring where needed. 4. Approve modifications to loan agreements. 5. Evaluate underwriting requirements and make appropriate adjustments as needed to accomplish the objectives of the program. 6. Provide direction regarding collection(e.g. legal action, foreclosure, acceleration of amortization, determination of default/charge-off, etc.) 7. Conduct annual review of loan documents and credit files. PORTFOLIO MANAUMEM GUIDELINES 1. Loans to start-up businesses shall not exceed 25%of the loan pool. 2. Revolving Lines of Credit shall not exceed 35%of outstanding loan commitments. 3. The total of loan principal past due 30 days or more shall not for any month exceed 10% of outstanding loan commitments. Any exception to the above will result in a moratorium on future loan requests and a review of these loan guidelines by the Loan Committee. SPREAD ALLOCATION During the first two years of operation, financial institutions will fund commitments at Prime minus 2% in order to provide sufficient spread to substantially defray administrative and servicing costs, plus provide a source to gradually replace the loan loss reserve established by the County. At the end of the second year, this entire issue will be reviewed and adjustments made as necessary.